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Find 2016 financial statements for General Electric (Stock ticker: GE) from Yahoo! Finance, Google Finance,

(1) Estimate the company’s weights of capital (debt, preferred stock, and common stock).

(2) Estimate the company’s before-tax and after-tax component cost of debt;

(3) Estimate the firm’s component cost of preferred stock;

(4) Estimate the component cost of common equity using CAPM.

(5) Compute the firm’s weighted average cost of capital (WACC). Discuss your findings.

General Electric (Stock ticker: GE) Financial Statements:

https://finance.yahoo.com/quote/GE/financials?p=GE

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Trinidad Tremblay
Trinidad TremblayLv2
28 Sep 2019

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Please help thanks

For Kellog

Rating Fitch: BBB

Price 103.12

Coupon(%) 3.125

Maturity 17-May-2022

YTM(%) 2.661

Current yield(%) 3.030

Cost of Debt

-Use the yield to maturity from either your company’s actual bond or from the similarly rated company’s bond as an estimate for your company’s pre-tax cost of debt.

-Calculate your company’s after-tax cost of debt using a 35% marginal tax rate. (Pre-tax cost of debt)(1 – marginal tax rate). Note bond rating for each company.

Cost of Equity

-Estimate the cost of equity at least two ways:

CAPM (You must use CAPM as one of your methods.)

Reworked Gordon Model: (D1/P) + G

Bond yield + risk premium

-Remember to use the current RFR (10 year Treasury Bond). Assume Required Return on the Market is 11%. Get current stock price. Get estimated D1 and G from either Valueline or Yahoo Finance (analyst estimates).

-Decide on your best estimate of cost of equity to use in calculating WACC.

Calculate the Weights of each Component of the Company’s Capital Structure

-Look at the company’s balance sheet and assume their current capital structure is their target capital structure.

-Use only Long Term Debt and any Capitalized Leases in the weighting for debt.

-See if the company has any preferred stock to weight.

-Use total common shareholder’s equity for the weight of common equity.

Calculate the Company’s Weighted Average Cost of Capital (WACC).

Explain in details how you can estimate weighted average cost of capital for a listed firm in addition discuss in your answer any problems (Statistical) which your analysis might encounter. Weighted Average Cost of Capital is the average cost of a company’s capital after tax . Cost of comapny capital includes common stock, preferred stock, bonds, and any other long-term debt.

Please double check your work

1) Foliage Company’s 10 year bonds, which have a coupon of 4%, currently trade in the market at a 4.8%yield to maturity. If its marginal tax rate is 35%, what is the company’s after-tax cost of debt?


2) Foliage Company’s investment bankers told the company that it could issue a preferred stock with adividend of $5.50 and a price of $98. Issuance costs would be 1.2%. What is the company’s cost ofpreferred stock?

3) Foliage Company’s future earnings and dividends are expected to grow at a constant rate of 3% peryear. Its common stock currently trades at $15 per share. It paid a dividend of $2 per share yesterday.The company has a beta of 1.75. The current risk free rate is 2%, and the required return on the marketis assumed to be 12%. The company can issue bonds at a 4.8% yield to maturity.
a) Calculate the firm’s cost of equity using CAPM.

b) Calculate the firm’s cost of equity using the Dividend Yield + Growth rate model.

c) Calculate the firm’s cost of equity using the Bond Yield + Risk premium approach (assume the mid
point of the risk premium range of 3-5%).

d) Based on the above, what do you want to assume for the company’s estimated cost of equity?

4) Assuming the company’s current capital structure is its target capital structure, if Foliage Companyhas the following capital structure, what is the firm’s weighted average cost of capital (WACC)? (Usehighest cost of equity estimate in your calculations.)
Debt $100,000,000

Preferred Stock 20,000,000

Common Stock 200,000,000

5) If Foliage changes its target capital structure to increase the amount of debt by 50% and reduce the
amount of common equity by 25% (and does this by borrowing $50,000,000 and using the borrowedfunds to retire $50,000,000 of common stock), what is its new WACC? Why did the WACC decline?

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